Finding Opportunities Hidden Amid Pending Retirement Plan Legislation

Oct 21, 2019

 
Are we on the verge of a retirement revolution? Major changes to retirement savings could soon be underway thanks to upcoming legislative initiatives. In this webinar we discuss the potential impact on the retirement industry, your business and your clients. 

We’ll discuss to of the most important pieces of pending legislations:
  • The “Setting Every Community up for Retirement Enhancement (SECURE) Act 
  • The Retirement Enhancement and Savings Act (RESA)
  • In addition, we’ll cover proposed and final regulatory changes arising from President Trump’s executive orders
Plus, discover how to grow your practice with potential opportunities in key areas:
  • Required Minimum Distributions
  • Tax Credits
  • Multiple Employer Plans
  •  Increased Cash Out Thresholds and more 

Click here to download a copy of this presentation. 
Click here for a synopsis on Key Legislation and Regulations

Transcription

Margaret Miley: Another item in these bills that I think will also potentially be helpful is the timing of when you can establish a plan. Right now, if you want to adopt a qualified plan, you need to get that plan in place by the end of the tax year, in order for you to take a deduction for any contributions you make to that plan for the tax year.

Margaret Miley: Under both of these provisions, there is language that would allow employers to establish a new plan as late as the due date, including extensions for the employers' tax return to the year. Let's take a calendar year corporation. Let's say they wanted to establish a plan. Let's say we're in 2020, and it's corporation's filing, it's getting ready to file its tax returns, and it sees it would like to have the ability to make a deductible contribution to a qualified plan for its 2019 tax year. But the 2019 tax year has already closed We're in 2020. It's filing its tax returns for 2020 and get the deduction for its 2019 tax year. That is something that would not currently be available to it today.

Margaret Miley: We're going to spend quite a bit of time today talking about multiple employer plans or MEPs. There is language in both SECURE and RESA that impact. Next, in both SECURE and RESA, there is language that allows individual defined contribution plans to file a single, but 5500 if they have the same trustee, the same names fiduciaries, the same plan administrators and plan years, and offer the same investment options.

Margaret Miley: You can have a number of unrelated plans if they all have the same trustees, and fiduciaries, and plan years, and investment options. Then under these bills, they would all be able to file a single 5500. That doesn't mean they're a MEP. But it allowing allows those aggregation of individual plans to take advantage of something that is one of the key benefits of a MEP, which is the ability to file a single 5,500 instead of having to file individual 5,500 for each of those plans.

Margaret Miley: In addition to that, RESA but not SECURE actually has specific language about multiple employer plans. Under RESA, if you have what's known as a pooled plan provider, and that is an entity that agrees to be the names fiduciary of the plan agrees to handle all the plan administrator duties, acknowledges its fiduciary status in writing, and registers as a pooled plan provider. If you have an entity that decides it wants to be involved in this market, and is willing to register as a pooled plan provider and provide all those required functions, then it can establish what's known as a closed MEP.

Margaret Miley: If it does that, then all of those individual defined contribution plans can be treated as a single plan, they can file a single 5,500. There would be a single trust, there would be one audit instead of potentially a number of individual audits for each of those plans, et cetera. This pooled plan provider concept is available to financial services firms, which is something that is not currently available under the regulations that we're going to talk about later.

Margaret Miley: I think those probably are some of the provisions of the proposed regulation that will be most helpful to your clients, but there's an awful lot in there as well. I would encourage you to look at the handouts and take a look at everything else that's being proposed and what the differences are between those two bills. If you have any questions about that, you can certainly send them to us and we can address them for you.

Margaret Miley: We talked about the fact that the legislation has a lot of language in it that would be helpful to financial services firms that want to offer a closed MEP for its clients. There's also a lot of regulatory activity currently going on that also covers multiple employer plans. These regulations are an outgrowth of executive order 13847, which was signed by President Trump back in September of last year.

Margaret Miley: Under that executive order, the Secretary of Labor was directed to clarify who could establish a multiple employer plan who qualified as an employer for purposes of establishing a multiple employer plan. Consider whether groups or associations of employers could be an employer for purposes of establishing a MEP. It also directed the Secretary of Treasury to amend regulations or consider amending regulations that would address what's known as the one bad apple rule in MEPs.

Margaret Miley:  If you have a multiple employer plan, which is a plan where a number of unaffiliated employers participate, each of those plans or each of those employers, even though the plan itself it's a closed MEP only has to file a single 5,500. Each of the employers is subject to their own discrimination testing and all of the other qualified plan rules that apply.

Margaret Miley: If a given participating employer fails a discrimination test and doesn't take appropriate corrective action or if it otherwise fails to comply with the qualified plan rules, the entire MEP is potentially exposed. That's known as the one bad apple rule or sometimes it's known as the unified plan rule. It's been one of those roadblocks to increasing participation in MEPs because employers are hesitant to get involved and participate in the MEP if somebody that they're not related to could potentially taint the entire MEP and hurt its employees.

Margaret Miley: One of the things that Trump did with this Executive Order is he directed the Secretary of Treasury to look at that issue and see what could be done to ease the concerns of businesses who might otherwise consider participating in these MEPs. They also are supposed to be looking at the life expectancy and distribution period cables for required minimum distributions as well.

Margaret Miley: Then finally, the Executive Order directed both Treasury and Labor to review retirement plan disclosures to see where there might be opportunities to make those disclosures more useful and less costly to employers to produce, including looking at whether there's an opportunity to use electronic delivery, if we can make the barriers for providing those disclosures to participants less costly to employers.

Margaret Miley: As a result of that Executive Order, there's been a lot of activity on the regulatory front. To date, what's happened is back in July of this year, the IRS proposed regulations on the one bad apple rule for MEPs. We'll talk about that in a minute. Then on July 31 of this year, the Department of Labor issued final regulations providing some guidance on who could be an employer for purposes of establishing and sponsoring a multiple employer plan.

Margaret Miley: Then also, there has been guidance on electronic delivery delivered by the Department of Labor to the Office of Management and Budget for review in August. Typically, when regulations get sent over to OMB, those regulations are published in proposed form, usually within 30 days or so. Now, obviously, this was sent over in August. We're now in October. That 30-day normal window has passed and we haven't seen the proposed regulations yet. But I anticipate that at some point we will. I think that will be very welcome guidance, or everybody, not just small employers, but everybody in the retirement plan industry.

Margaret Miley: But right now, I don't have any information to share about what is contained in those regulations. Let's talk about the final regulations that the Department of Labor issued back at the end of July. Again, just to set the stage because I don't know where everybody is at in terms of familiarity with MEPs. But a MEP is a retirement plan in which several unaffiliated employers participate. There are two types of MEPs historically.

Margaret Miley: In an open MEP, the participating employers are treated as maintaining individual retirement plan. Each participating employer has to file its own form 5,500, it may need to employ an accountant to perform an audit of the plan. It has to have its own ERISA fidelity bond, et cetera. Then there's also a closed MEP, where the MEP is treated as one single retirement plan. It files only a single 5500. Under those a single audit, uses a single trust, has a single arrest of fidelity bond et cetera.

Margaret Miley: Historically, to be considered a closed MEP, which is sort of like the gold standard MEPs. If you're going to be in a MEP as a participating employer, you want to be in a closed MEP if you can because the costs involved in maintaining a closed MEP should be a little bit less than in an open MEP because you do only have that single 5500 and a single audit et cetera.

Margaret Miley: But historically to be considered a closed MEP, all of the participating employers were required to have employment based common interests. They could not be just this disaggregate on compilation of participating employers, they had to have some sort of employment based common nexus and that was known as commonality.

Margaret Miley: Under these new DOL regulations, that requirement to have commonality has been relaxed somewhat. There are two types of MEPs or Association Retirement Plan that exist under the new DOL regulations. There are MEPs that are sponsored by bona fide groups or Association of Employers, and there's MEPs sponsored by bona fide Professional Employer Organization. If you have a MEP, sponsored by a bona fide group or Association of Employers, and all of the participating employers have principal places of business in the same geographic region, not exceeding the boundaries of a single state or they have principal places of business in the same metropolitan area, then the MEP is treated as a closed MEP, even though the only connections between the employers is the fact that their businesses are in the same geographic region.

Margaret Miley: When you have this bona fide group or Association, and you're in the same geographic region, you don't have to have the commonalities to have. You can still be treated as a closed MEP and get all the benefits of being in a closed MEP. Also, if the MEP is sponsored by a bona fide Professional Employer Organization, you get the benefits of being in a closed MEP, even if the only connection between the participating employers is that they are clients of the PEO.

Margaret Miley: If you can't fit within those first two bullets, you can still be a closed MEP. But in that case, the participating employers all have to be in the same trade or industry or line of business. The commonality requirement is still there, but it is relaxed. It's better than what it was, but it's not quite where we want to be.

Margaret Miley: In particular, the regulations do not permit financial services firms from sponsoring a closed MEP. It has to be either a Professional Employer Organization or a bona fide group or association of employers. That is something like a Chamber of Commerce for example, or a trade association but entities like broker dealers or advisory firms or third party administrators or banks, et cetera. Those types of financial services firms are not permitted under the regulations as they were finalized to sponsor a closed MEP.

Margaret Miley: Now the DOL did ask for information from the public, on whether it should expand the regulations to permit financial services firms to sponsor a closed MEP. I believe the comment period for submitting information and input regarding that is still open. I think it's open till the end of the month if I'm not mistaken. But right now again, under these final DOL regulations, financial services firms cannot sponsor a closed MEP.

Margaret Miley: Now, again, going back to the proposed legislation. If that proposed legislation takes effect, then that will change and financial services firms who register as a pooled plan provider would be able to sponsor a MEP. But right now under the final DOL regulations, they cannot. These regulations took effect September 30th of this year.

Margaret Miley: In addition to the final DoL regulations, there are some proposed IRS regulations that address one of the other roadblocks to MEPs and that's the one bad apple rule, or the unified plan rule, which we've talked about a little bit. What these proposed regulation states is that a defined contribution MEP will not be disqualified due to the actions or inactions of a participating employer, if it's eligible for relief, and if it takes certain actions to ensure the qualified status of the MEP as a whole.

Margaret Miley: These proposed IRS regulations are really built around and look a lot like the employee plans compliance resolution system that is currently used by plan sponsors to correct operational or other defects in their plans. To be eligible for this release, the MEP has to have established practices and procedures designed to promote compliance with the code. It also has to have language in the MEP document that describes the processes that will be followed if a participating employer fails to address a perceived qualification issue.

Margaret Miley: As long as you have this established practices and procedures and you've got language in the MEP addressing what's going to happen if a participating employer is non responsive, then the MEP is eligible for relief. If it's eligible for relief and it takes this certain actions, then the actions or inactions of an individual participating employer will not change the qualified status of the MEP as a whole. Basically what it would have to do is it would have to provide up to three notices to the participating employer telling it what it believed the problem was and asking it to take action.

Margaret Miley: If the participating employer comes back to it and says, "Okay, this is how I want to address this issue," then the MEP sponsor has to quickly implement whatever actions the participating player wants to take. Alternatively, if the employer and the participating employer doesn't respond, and it doesn't ask that it's plan B spun off from the MEP, then the MEP sponsor would have to take action in its own hands to unilaterally spin the participating employers' portion of the MEP, often to its own plan, and terminate that plan.

Margaret Miley: But this is a series of just what all happened over a period of time. You first send three notices to the participating employer. The last one is going to include a notice to the participants and the Department of Labor. But it does give you a roadmap for how you can protect the qualified status of the MEP if you have a participating employer in it, that doesn't want to follow the rules.

Margaret Miley: Now, these are just proposed regulations. They are not currently in effect. They were proposed on July 3rd, and the comment period for them closed on October 3rd. But there is a public hearing scheduled, I believe, for December 11th. There's still an opportunity to raise concerns about the proposed regulations or what have you. But that that hearing, I believe, is scheduled for December 11th in Washington, DC. That's some of the activity that's going on not only in proposed legislation, but also in the regulatory arena, affecting retirement plans right now. I'm just going to hand that over back to Mike to continue.

Mike DiCenso: Again, what we see is there's an awful lot of activity, whether it be Congress, whether it be President Trump around the Executive Order, RESA, Portman Cardin, or senator White House's bill around having IRAs that are payroll IRAs for any employer that has 10 or more employees. All this action is around trying to help small mid-sized employers, the institute plan so that they can now get more employees into a retirement savings program. This is all around helping individuals to actually get a retirement savings program going for themselves to secure their retirement.

Mike DiCenso: Now, what we've seen in the past, the reasons that small to mid-sized employers have not instituted plans. Number one, it's the cost of operational plan is that these plans have been expensive for them to operate. What we see is now with these acts that are out there, we see tax credits. They're well above with the tax credits are today. For example, with SECURE Act or RESA, what we see is the $500 tax credit today will go to 5,500 along with putting in a plan and doing auto enrollment. This is a major increase from where we are today.

Mike DiCenso: Necessarily, the plan sponsors want to offload or don't want to deal with the fiduciary duties, obligations, liabilities that they have with running a plan. These are small businesses that have small HR departments, and they don't have large staffs to operate these plants. Necessarily, this a lack of HR resources. For those of you who deal with these plans, you know that there are a number of different areas to where payroll and HR come together.

Mike DiCenso: In this, what we have is we have a number of people who are out there and saying, "I don't have these resources around this plan so I'm not going to put a plan in place." It's all around the small to mid-sized employers who are fighting daily to grow their revenues and grow their profits. With these regulations and with the Trump Executive Order what we see is a lot of these issues will be going away. They're addressing these items, making this more cost effective, bringing in resources in which will alleviate the fiduciary liabilities, duties, and obligations, and helping plan sponsors and small to mid-sized employers put these plans in place.

Mike DiCenso: Next slide. As we look at open and closed MEPs, now one of the big differences that I want to bring up is what's happened here with this new regulations gone into place as of September 29th. What you see with closed MEPs under the new regulation, there's no requirement for the lead employer to place their employees into the MEP. With open MEPs, the lead employer still has to place their employees into the MEP. So with this, there's a major difference.

Mike DiCenso: Now, as you look at the closed MEPs, and you look at the types of closed MEPs, there are going to be through associations, better business bureaus, agencies, PEOs, franchise firms, and other Chambers of Commerce. You look at this, if they are the lead employer and they don't put their employees into the MEP, you can see how that would restrict growth of others adopting the MEP. Part of an organization and the lead employers not putting their employees into the MEP, why would I put my employees into that MEP? That's just something to be aware of out there with plan design, marketing, and actual bringing these MEPs to surface.

Mike DiCenso: Next slide. As you look at the lead employer, the lead employers actually have a plan administrator. They hold all the duties of a plan administrator. They are the ultimate fiduciary of these clients. The adopting employer, they have limited liability and limited decision making. They're just following what the lead employer is doing, so you take a look at adopting employer and talk about offloading and outsourcing. Their real responsibility is to monitor and benchmark the lead employer on an annual basis. That is what they do. That is their responsibility.

Mike DiCenso: Therefore, every adopting employer that an adapts into the MEP, especially those closed MEPs, is really limiting their liability of writing that plan. Next slide. Now as we look at MEP plan design, the real key even though there is flexibility is to have consistency. Consistency is what brings the pricing down that will help to create that efficiency in the pricing, that help create the efficiency of running the program. You can have different investment lineups, you can have different waiting periods. You can have different type of offerings. But when you get down to it, what creates the efficiency for the process and for the pricing, it is having that consistency.

Mike DiCenso: As we're helping to design these MEPs around the country, and helping advisors, we're consulting through that process of planning design. Next slide. Now the real advantages for plan sponsors here is that they are offloading and outsourcing for both the lead employer and the adopting employers. The lead employer is mitigating the risk to hiring a 3(38) investment fiduciary a 3(16) operational fiduciary for the MEPs, then the sufficiency of the client service from the standpoint of one fun lineup and consistent plan design.

Mike DiCenso: From the advisor perspective, if you think about this, if you have a MEP that has 50 plans in it, as compared to you going out to the market and having 50 plans with 50 separate employers. When you go out with those 50 separate employers you're going to have 50 different quarterly meetings with each of those employers to go over the investments of plans. Under the MEP, you have one quarterly meeting with all 50 of those employers at once. There's a huge efficiency for advisors here, and how they operate and how they service the MEPs as compared to serving what else plans so that one quarterly meeting that one review because the consistent funds lineup is a major time saver and cost center to advisors.

Mike DiCenso: Next slide. We look at 3(16) services. Going to the next slide, what you'll see is you need a 3(16). It is going to be handling all distributions, reviewing them, approving them signing off as a fiduciary act and then distributing. This takes all the work off of the employer from having to do anything with any participant terminations, loans, QDRO's, hardships or disbursements of any type. This takes that lead employer and the adopting employer totally out of the process. They are not involved in any way shape or form that that plan participant is coming strictly to the 3(16).

Mike DiCenso: In these situations, Newport Group is the largest 3(16) in the nation by net capital cover claim. In this, we are deep into this business of MEPs and deep into 3(16) administrative fiduciary sourcing to where plan sponsors and participants bring this to us from the standpoint of relieving that liability, relieving the process, and relieving the time allocated to handling these processes.

Mike DiCenso: We also track eligibility, we track all of the beneficiaries, and we send out all the notices. In this, it is creating great efficiency with running these plans and also alleviating that fiduciary risk by signing on as the fiduciary to the plan on the administrative side. Next slide. With this is you look at Newport group where we can help you from the standpoint of our broad and deep expertise and experience with handling MEPs. We have over 120 MEPs on the books today. Our largest MEP has about 200 adopting employers and entities to it would bring thought leadership in this area.

Mike DiCenso: We have a number of white papers, critical thinking pieces, as well as pieces you seen on this webcast today. If any of these can be of service or resource to you, please contact myself or our regional directors. We're more than happy to share all this information with you. Next slide. As you look at Newport Group overall, now where we shine in this business is if it's just a plain 401(k). There's 200 providers out there that can deliver a plan to you. It's an integrated, qualified and non qualified plan. There's three to five providers that can really deliver that integrated experience for plan participants. There's an integrated, qualified, non qualified plan with 3(16) that is fully integrated. Newport Group is the only provider that delivers that in the marketplace today. Now we'd like to just open this up for questions.

Speaker 1: Hey, Mike. Here we've gotten a number of great questions. The first one I think would be for you. Here it goes, in a MEP, can the lead employer accept compensation for sponsoring the MEP and then for offsetting expenses of sponsoring them?

Mike DiCenso: That is a great question because there are some mixed answers that people are getting in the industry. The answer is, first of all, yes. The lead employer can accept compensation that is reasonable. Now, people say, "Well, it's a fiduciary, they can't accept compensation." Well, this is no different than a 3(38) is a fiduciary to the plan, and they can accept compensation. The way this works is under 4(60) there's a prohibited transaction. But under 4(45) there is a prohibited transaction exemption that allows for that lead employer of the MEP to accept compensation. The compensation has to be reasonable, but they absolutely can accept the compensation.

Speaker 1: Thanks, Michael. The next question, I think this would go to Margaret. Margaret, with the SECURE Act as it's currently drafted will that apply to church plans?

Margaret Miley: Well, the SECURE Act, there's nothing carving out church plans from the provisions of the SECURE Act, but to the extent a particular provision doesn't apply to such plans then it wouldn't be available. For example, the tax credits that we talked about, those are only available to employers other than tax exempt entities or governmental entities. A church plan as a tax exempt entity would not be able to take advantage of the tax credit. But there are a lot of provisions in SECURE and in RESA that apply, generally, and there are no specific carve outs for church plan. In general, yes, SECURE does apply to church plans.

Speaker 1:  Thanks, Margaret. Just a reminder to everyone on the call, you can send us your questions in the control panel. There's a place where you can input those questions, so keep sending them in. This next one, I think also would go to Margaret. Can you give us an update on the IRS's proposed rules regarding MEPs that have a participating employer that's in violation of ERISA requirements? Is there a timeline? What is the likelihood of the rule going into effect? Then lastly, current risk to net participant in employers versus reduction risk because the IRS's proposed rules go live.

Margaret Miley: Okay. The IRS regulations addressing the one bad apple rule were proposed on July 3rd, and they are in proposed form. They don't take effect until they're finalized. I don't know that there's a lot controversial in the regulation. My experience is that most regulations are finalized, generally, within 12 months of the date that they're proposed unless there's something significant or controversial in them and I don't think that's the case here.
 
Margaret Miley: My expectation is that they will get finalized, likely in much the same form that they were proposed certainly within the next year. But right now, the common period has ended. Like I said there's a public hearing scheduled in December for people to address any concerns that they have and then I would expect them either to be republished in re-proposed form or in final form. But I do anticipate that it will get passed eventually.

Margaret Miley: In terms of risk to plan sponsors, right now, there is a risk if you are a participating employer in a MEP. There is a risk that if there is a recalcitrant employer in that plan who doesn't take care of business and doesn't comply with IRS rules, that your particular share of that plan could be impacted in an adverse way and there's no clear path right now for addressing that. It's really important if you're a participating employer right now, that if you're interested in the MEP, it's important that you do your due diligence and make sure that the service providers to the MEP and the sponsor of the MEP know what they're doing in our competence, so that you don't have to be worried about the MEP not being run appropriately where there's participating players.

Margaret Miley: But there is that risk right now. It does go away once these regulations are finalized.

Speaker 1: Michael, before the next question, I just saw another one come through where someone's asking about the compensation doesn't need to be flat fee or can it be AUM for that compensation to the lead employer, and it doesn't matter, it just has to be reasonable. Again, just like with any fiduciary, or anybody serving in a recent plan, the compensation and the fees has to be reasonable. That is the key is that it's reasonable. Thanks, Mike. Yeah, and I think we have time for one more question. If we didn't get to your question that you submitted to us we'll reach out to everyone, individually. Mike, I think this last question is for you. How does financial advisors prospect and when open net cases?

Mike DiCenso: That's a great, great question from the standpoint of RRDS out in the field they're there working with you, can help you with this. But it's looking at where you work, looking at your relationships. Anybody that is a member for that is a group from the standpoint of a Chamber of Commerce, a better business bureau, an association, a franchise group. These type of entities are a tremendous opportunity for the MEPs as well as you the advisors yourself.

Mike DiCenso: We are working with advisors out there, and RAAs who are starting their own MEP. Now, there's an open MEP for their clients. We're looking at these, we have a questionnaire we go through to deliver the pricing for that MEP. The advisor is now bringing to their entire client base consistent pricing, consistent fund lineup, and consistent process. In doing this from the standpoint of prospect, me as an advisor, it's again, those PEOs, those associations, better business bureaus, Chambers of Commerce, affinity groups, and any sort of franchise group. Further, with you potentially starting your own MEP, you're not considered a financial institution as an RA or as an advisor. Therefore, you can have your own MEP. Hope that's helpful.

Speaker 1:  Yes, it was Mike. Thank you, Mike and Margaret, and thanks to all of you all for joining us. We appreciate you being here and we'll see you again next time. Have a great day.

Mike DiCenso:    Thank you, everyone.
 

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